Shellshocked by Volatility: 1Q in Review

Each quarter, the Raymond James Investment Strategy Committee completes a detailed survey sharing their views on the investment environment, and their responses are the basis for a discussion of key themes and investment implications covered in this quarter’s Investment Strategy Quarterly. Read an overview of the key themes below, or download the entire publication for a more thorough view of the markets and the economy.

U.S. Economy

“In a late-cycle economy, the risks of a Fed policy error (raising short-term interest rates too fast or too slow) are increasing, but further gradual rate hikes are to be expected.”

“Economic data for January and February suggest a soft start to the year, but growth is widely expected to remain strong in 2018-19, supported by expansionary fiscal policy.”

“With GDP growth expected to be above its long-term sustainable pace, the unemployment rate is expected to fall further, adding to wage pressures.”

“By themselves, the tariffs on imported steel and aluminum should not have a big impact on the economy. The bigger fear is that we’ll see a wider trade war develop, higher input costs, retaliatory tariffs against U.S. exports, and increased uncertainty for global investment.”

– Scott Brown, Ph.D., Chief Economist, Equity Research

U.S. Equity

“I’m approaching the trade battles as noise items for sev­eral reasons. As a reminder, ‘noise items’ are things that cause equities to pullback but are not extensive enough to derail a bull market.”

“The tariffs are part of the negotiating process. I don’t feel ei­ther side will be aggressive enough to threaten global growth. For this reason, I think the structural pillars of support for the equity markets- healthy economic and earnings growth- are the two most important variables of a bull market.”

“Other noise items joining trade that are likely to lead to higher volatility in the period ahead include inflation, wage growth, interest rates, and monetary activities.”

“Over half of February’s decline was due to systematic trading programs, in my opinion. I don’t think a move back to the February low will transpire but should it I don’t feel stocks will stay there long. I would be a buyer of weak pe­riods until something changes the prospects for economic and earnings growth.”

“As for the markets and tariffs, I think it depends on what kind of retaliatory environment we enter into. It’s not a time to panic.”

– Jeff Saut, Chief Investment Strategist, Equity Research

“As we’ve said, not a lot has fundamentally changed. The market was so extended at the end of January. We had not seen any weakness in so long that the recent pullback used to just be considered a perfectly normal downturn.”

“I think the market’s not sure what to focus on right now.”

– Andrew Adams, CFA, CMT, Senior Research Associate, Equity Research

International Equity

“I think you buy Brexit fear and anticipate some positive reform efforts across Europe led by the Macron-Merkel nexus. The corporate earnings season seemed consistent with such a view, given that 52% of reported earnings results from Thomson-Reuters Stoxx 600 companies exceeded an­alyst estimates. In a typical quarter, 50% beat analyst EPS estimates. That’s a good enough backdrop to stay excited.”

“A weakening U.S. dollar has helped emerging markets, and Chinese reforms are still positive. By contrast – in Asia – Japan remains a poster child for how not to do things: no reforms and a lot of sustained quantitative easing, which seems to have little impact.”

– Chris Bailey, European Strategist, Raymond James Euro Equities*

U.S. Fixed Income

“We have a lot of different forces in the bond market. Some are pushing and some are pulling on rates, creating a little havoc. Stocks and bonds actually have been correlated lately, which is unusual, but we’re in an unusual time too. Typically, corrections are prompted by a slowdown in the economy, but now there appears to be fear that the econ­omy’s doing too well.”

“You see the government trying to boost the economy through fiscal policy. At the same time, the Fed is pushing short-term rates up and is expected to continue to do so this year. There are both headwinds and tailwinds in place, so I see rates remaining range bound. Perhaps the range is slightly higher.”

– Doug Drabik, Senior Strategist, Fixed Income

“Even though the Tax Reform and Jobs Act lowered individual income tax rates, the top tax bracket is 37% v. 39.6% previously. For investors in the top tax bracket, and especially those who reside in high tax states like California, New York, New Jersey and others, the tax equivalent yield advantage of in-state municipal bonds is highly attractive on a risk/reward basis.”

– Ted Ruddock, Head of High Net Worth, Fixed Income Services

Energy and Oil

“All the rhetoric about more Fed rate hikes against the back­drop of expansionary fiscal policy has started to push the dollar back up versus its recent three-year lows. On the margin, that is negative for oil prices, though declining inventories have been supporting higher prices.”

“The other issue is the new steel tariff. Drilling, extraction, and pipeline transportation of oil and gas is a steel-intensive supply chain. Pipes, drilling rigs, tubular goods – all of that requires steel in large quantities.”

“The U.S. oil and gas industry has a cost advantage over much of the world, and that advantage should still remain in place, but clearly the steel tariff is unhelpful in this regard. For example, some of the proposed Gulf Coast energy in­frastructure projects may be postponed or even canceled.”

Housing

“We still have the same issues holding back construction: inflation and labor constraints. As long as residential fixed investment isn’t taking a dive, meaning that the consumer stops buying or spending on his house, we are in good shape.”

“Look, everything’s good in housing. We probably have too much multi-family housing right now. In our research and outlooks for 2018, we went underweight apartments. We have a little too much supply coming at us. This will work itself out on the demand side of the equation, but this is not the year to be owning apartments. It’s still the year to own the homebuilders.”

“Steel tariffs will affect the costs of commercial real estate since these buildings are made out of concrete, glass, and steel, whereas residential is primarily built with lumber.”

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